687 / What is a qualified tuition program (also known as a 529 plan)?

As a general rule, a qualified tuition program is exempt from federal income tax, except the tax on unrelated business income of charitable organizations imposed by IRC Section 511.⁴ See Q 689 for the tax treatment of distributions from qualified tuition programs. See Q 844 for the estate tax treatment and Q 902 for the gift tax treatment of qualified tuition programs.

To be treated as a qualified tuition program, a state program or privately sponsored program must:

(1) mandate that contributions and purchases be made in cash only;

(2) maintain a separate accounting for each designated beneficiary;

(3) provide that no designated beneficiary or contributor may directly or indirectly direct the investment of contributions or earnings (but see below);

(4) not allow any interest in the program or portion thereof to be used as security for a loan; and

 (5) provide adequate safeguards (see below) to prevent contributions on behalf of a designated beneficiary in excess of those necessary to provide for the beneficiary’s qualified higher education expenses.⁵

With respect to item (3), above, the IRS announced a special rule that state-sponsored qualified tuition savings plans may permit parents to change the investment strategy (1) once each calendar year, and (2) whenever the beneficiary designation is changed. According to Notice 2001-55, final regulations are expected to provide that to qualify under this special rule, the state-sponsored qualified tuition program savings plan must: (1) allow participants to select among only broad-based investment strategies designed exclusively by the program; and (2) establish procedures and maintain appropriate records to prevent a change in investment options from occurring more frequently than once per calendar year, or upon a change in the designated beneficiary of the account. Until such final regulations have been issued under IRC Section 529, the IRS will allow qualified tuition programs and their participants to rely on the guidance provided in the notice.⁶

Program Established and Maintained by One or
More Eligible Educational Institutions

A program established and maintained by one or more “eligible educational institutions” must satisfy two requirements to be treated as a qualified tuition program: (1) the program must have received a ruling or determination that it meets the applicable requirements for a qualified tuition program; and (2) the program must provide that assets are held in a “qualified trust.”⁷ “Eligible educational institution” means an accredited post-secondary college or university that offers credit towards a bachelor’s degree, associate’s degree, graduate-level degree, professional degree, or other recognized post-secondary credential and that is eligible to participate in federal student financial aid programs.⁸ For these purposes, qualified trust is defined as a domestic trust for the exclusive benefit of designated beneficiaries that meets the requirements set forth in the IRA rules, (i.e., a trust maintained by a bank, or other person who demonstrates that it will administer the trust in accordance with the requirements, and where the trust assets will not be commingled with other property, except in a common trust fund or common investment fund).⁹

Qualified Higher Education Expenses

The term qualified higher education expenses means (1) tuition, fees, books, supplies, and equipment required for a designated beneficiary’s enrollment or attendance at an eligible educational institution (including certain vocational schools), and (2) expenses for special needs services incurred in connection with enrollment or attendance of a special needs beneficiary.¹⁰ Qualified higher education expenses also include reasonable costs for room and board, within limits. Generally, they may not exceed: (1) the allowance for room and board that was included in the cost of attendance in effect on the date that EGTRRA 2001 was enacted as determined by the school for a particular academic period, or if greater (2) the actual invoice amount the student residing in housing owned and operated by the private college or university is charged by such institution for room and board costs for a particular academic period.¹¹

Under the 2017 Tax Act, Section 529 plans were expanded to include the use of up to $10,000 per year for elementary or secondary school expenses.¹²

Under the SECURE Act, up to $10,000 in 529 plan funds can be used to repay the designated plan beneficiary’s student loans (or student loans of the beneficiary’s siblings).¹³ The $10,000 limits are cumulative, meaning that the amount is reduced by any distributions treated as qualified higher education expenses under the new provisions in prior years. However, amounts treated as a qualified education expense with respect to a sibling’s student loan repayments are not counted with respect to amounts available for the designated plan beneficiary. The available deduction for student loan interest for a taxpayer is reduced in any taxable year by the amount of distributions treated as qualified higher education expenses under IRC Section 529(c)(9) with respect to loans that would be includible in gross income under Section 529(c)(3)(A) if not for the new rule.¹⁴

Additionally, up to $10,000 in expenses associated with the beneficiary’s participation in registered apprenticeship programs can be treated as qualified education expenses.¹⁵ The SECURE Act’s expansion of 529 programs applies retroactively, for tax years beginning after December 31, 2018.

The 2025 OBBB expanded the rules governing Section 529 plans.  Starting in 2026, the $10,000 limit on using 529 plan assets for K-12 education expenses increases to $20,000.¹⁶

The 2025 OBBB also expands the definition of qualified education expenses, effective as of July 4, 2025 (the date the bill was signed into law).  In the K-12 context, the following expenses are now qualified when paid in connection with a student’s enrollment in elementary or secondary public, religious or private school: (1) tuition, (2) curriculum and curricular materials, (3) books and instructional materials, (4) online educational materials, (5) tutoring or educational classes outside the home from a licensed (and non-related) educational instructor who is a subject matter expert in the relevant subject, (6) fees for standardized tests, (7) fees for dual enrollment in a higher education institution and (8) educational therapies for students with disabilities.¹⁷

Postsecondary credentialing expenses are now also included as qualified education expenses.  Any type of education expenses that would qualify in the context of enrollment in an eligible educational institution will now qualify if those expenses are incurred in connection with attending a recognized postsecondary credential program (i.e., tuition, fees, books, supplies, etc.).

Fees for testing required to obtain or maintain the credential are also included, as are continuing education-related fees required to maintain a recognized postsecondary credential.

The term “recognized postsecondary credentials” is broadly defined, for example, to include occupational and professional licenses issued or recognized by a state or federal government, those accredited by reputable organizations, those listed in the Department of Defense's COOL directory and those identified by the Treasury secretary.¹⁸

Adequate Safeguards

The safe harbor that provides adequate safeguards to prevent contributions in excess of those necessary to meet the beneficiary’s qualified higher education expenses is satisfied if all contributions to the account are prohibited once the account balance reaches a specified limit applicable to all beneficiaries’ accounts with the same expected year of enrollment.¹⁹ Total contributions may not exceed the amount established by actuarial estimates as necessary to pay tuition, required fees, and room and board expenses of the beneficiary for five years of undergraduate enrollment at the highest cost institution allowed by the program.²⁰

Reporting

Each officer or employee having control over a qualified tuition program must report to the IRS and to designated beneficiaries with respect to contributions, distributions, and other matters as the IRS may require. The reports must be filed and furnished to the above individuals in the time and manner determined by the IRS.²¹ In 2001, in light of the amendments to IRC Section 529 under EGTRRA 2001, the IRS released guidance regarding certain recordkeeping, reporting, and other requirements applicable to qualified tuition programs.²² Pending the issuance of final IRC Section 529 regulations, qualified tuition programs and their participants may rely on Notice 2001-81.

Bankruptcy

Under Section 225 of BAPCPA 2005, funds used to purchase a tuition credit or certificate or contributed to an account under a QTP no later than 365 days before the date of the filing of the bankruptcy petition may be excluded from the bankruptcy estate if certain conditions are met.²³